Emerging market M&A next market bubble?
London, January 20, 2008
Companies are trying to escape the credit crunch and economic slowdown in Europe and North America by seeking growth through acquisitions in emerging markets, but they could be piling into the next bubble.
Investment banks keen to keep firms engaged in mergers and acquisitions (M&A) are pushing assets in emerging markets to clients seeking to boost sales growth and hedge against economic downturns in their home markets.
But rising company valuations, already higher than those in mature markets, have prompted fears the market could be overheating.
'We could be seeing the beginning of an emerging market bubble,' said Ludovic de Montille, CEO for France-based bank BNP Paribas in Britain.
'There is competition for assets and also some valuations are reached on the basis of predicting continuous growth, whereas emerging markets are actually cyclical.'
Companies are investing in economies such as China and India as well as eastern Europe and Turkey on the expectation of faster growth.
Typically in such deals the assets are valued relative to a cashflow forecast and some bankers are concerned that such valuations sometimes ignore geopolitical risks and the possibility of recession.
Yet intense competition is driving prices to record levels as already evident, particularly in the banking sector.
European banks typically are valued in M&A deals around one and a half times book value. But banks in countries such as Poland, Turkey and Ukraine commonly trade around three to four times book value.
One reason these values are high is the additional scope for growth these countries have, but such growth attracts a high level of interest, pushing up prices.
Banking auctions in Turkey or eastern Europe regularly attract a who's who of leading global and European banks.
The auction of Denizbank in 2006, for example, attracted interest from the likes of Citigroup, Intesa, Societe Generale and BNP as well as the eventual buyer Dexia.
And a similar list of banks turns up at almost every eastern European or Turkish auction.
Denizbank ended up being sold for almost four times book value. In July last year, Saudi National Commercial Bank agreed to buy a 60 per cent stake in Turkish Islamic lender Turkiye Finans at a whopping 5.8 times book value, setting a new valuation record for Turkey.
Italy's Banca Intesa had also, in 2006, agreed to pay $1.4 billion or about five times book value for Ukraine's Ukrsotsbank before pulling the plans. Rival UniCredit agreed in July to pay more than $2 billion for Ukrsotsbank.
'In a time of uncertainty around growth rates in developed markets there is a huge level of interest to look at these high growth markets,' said a senior European M&A banker who has advised on such deals.
The need for companies to expand and enter emerging markets is not the only driver of competition.
Another factor is that, according to bankers, debt financing in emerging markets is easier to find and is often aggressively offered by local banks in countries such as Poland and Turkey.
This makes auctions there a prime area of interest for buyout firms, which typically use a lot of debt to fund deals and are keen to find places to invest their record funds amid serious problems funding deals in Europe and North America.
Kohlberg Kravis Roberts (KKR), for example, in December bought Turkish shipping company UN Roro.
And several of the world's biggest buyout firms including KKR and Blackstone are vying against trade bidders for Turkish retailer Migros, set to fetch more than $3.4 billion, a deal size becoming rare for buyout firms in western Europe.
And as the number of M and A opportunities in developed countries dwindles, more and more companies are likely to look at emerging markets and the prices could rise beyond sustainabilit